Analyst: Low storage, cold weather to lead to winter gas market volatility

Low natural gas storage levels and a return to near-normal colder temperatures in key heating areas of the United States could mean high price spikes or at least increased volatility this winter. To have 2.7 tcf of gas in storage by the official start of the winter heating season on Nov. 1, the industry will have to inject 7.6 bcf a day, said Ronald Barone, gas industry analyst at PaineWebber Inc.

Oct 20th, 2000


Low natural gas storage levels, along with expectations of a return to near-normal colder temperatures in key heating areas of the United States, could mean high price spikes or at least increased volatility this winter, says an industry analyst.

In order to reach a storage level of 2.7 tcf of gas by the official start of the winter heating season on Nov. 1, the industry will have to inject another 53 bcf of gas into storage facilities at the rate of 7.6 bcf a day, said Ronald Barone, gas industry analyst at PaineWebber Inc.

That's considerably more than the refill rate of 900 MMcfd at this same time in 1999 when the industry managed to meet its gas storage target of 3 tcf of gas by the start of the winter heating season. The prior 5-year average gas storage injection rate for the same period was 4.6 bcf/d, Barone said.

An early cold wave limited gas injections to only 29 bcf during the week that ended Oct. 13, including injections of 20 bcf in the East, 3 bcf in the west and 6 bcf in the primary US gas producing region, he said. That compares with total injections of 62 bcf during the first week of October and injection rates of 42 bcf and 58 bcf during the same periods in 1999 and 1998, respectively.

Despite a return to milder temperatures during the week ended Friday, the industry won't be able to make up that setback, Barone said. A projection of 2.7 tcf�or less�of gas in storage by Nov. 1 "remains on track," he said.

Moreover, the latest forecast by the National Oceanic and Atmospheric Administration (NOAA) suggests "normal" winter conditions in the Midwest, Northeast and Mid-Atlantic regions this year, with warmer-than-normal conditions in the south-central and Southwest US, where air conditioning already fuels a summer-demand season for gas.

Combining with weather and storage factors are "a robust underlying demand creep" even through the "very mild winters" of recent years, and "ongoing questions" about deliverability in the face of rapidly accelerating depletion rates in the main gas producing areas, said Barone.

Analysts at Salomon Smith Barney Inc. earlier predicted that producers will still be scrambling for more gas supplies in 2001, with even lower storage levels after a colder winter this year (OGJ Online, Oct. 16, 2000).

After three exceptionally warm winters in a row, the winter of 2000-2001 is likely to return to "more normal" cold levels that will use up more supplies of gas and home heating oil, said Jon Davis, a meteorologist at Salomon Smith Barney's Chicago office.

Robert Morris, chief energy analyst for Salomon Smith Barney, expects US gas storage to be in the range of 2.6-2.7 tcf by Nov. 1. Normally cold temperatures this winter would reduce US gas storage to roughly 500 bcf by the end of March, about half the amount that was left in storage in spring of this year, he said.

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